Islamic Finance Set To Tackle Long-Standing Repo Challenge

Separate but converging efforts are underway in Islamic finance to help develop globally accepted alternatives to conventional repurchase agreements, as the industry tries to crack one of its greatest structural limitations.

In the last several years Islamic banks have grown faster than conventional ones, partly because of economic booms in the core regions for Islamic finance, the Gulf and southeast Asia.

But the banks have largely lacked the collateralised money market tools which many bankers believe are essential for the industry’s long-term health and viability.

Developing sharia-compliant substitutes for repos would help Islamic banks manage their liquidity more cheaply and flexibly, allowing them to cope better during times of market stress.

Islamic banks are now considered systemically important in countries including Kuwait, Saudi Arabia, Qatar, Malaysia and the United Arab Emirates, according to the Kuala Lumpur-based Islamic Financial Services Board (IFSB).

Until now, progress in developing “Islamic repos” has been slow because of a lack of consensus among bankers, regulators and scholars on what structures would be both religiously permissible and financially effective.

But this is now changing. Pressure on regulators to agree on Islamic repo structures has increased; Basel III banking standards, now being phased in around the world, make banks’ need to manage short-term funding more acute, the IFSB said last month as it released draft guidance on liquidity risk management.

Early this month another Islamic standard-setting body, the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), said it was developing a sharia standard for repurchase agreements.

And on Sunday, the Bahrain-based International Islamic Financial Market (IIFM) released a contract template for collateralised murabaha transactions, a cost-plus-profit structure which might serve as an alternative to conventional repos.

So far, Bahrain and Malaysia have been at the forefront of creating such tools but more efforts are needed, Jeddah-based Mohamed Ali Elgari, an industry expert who sits on over 80 sharia boards around the world, told Reuters.

“Any successful structure has to satisfy the requirements of sharia, and the requirements of regulators, and the requirements of risk managers. To combine all these three factors, it’s very difficult.”

MOMENTUM

Conventional repos allow institutions to lend out assets for short periods to generate liquidity. This is problematic in Islamic finance because it entails charging interest.

“Repurchase is not permitted in a purchase contract. This is combining two types of contracts,” Elgari said.

Also, Islamic finance specifies that actual ownership of collateral be transferred, a requirement which has limited the international approval of some solutions.

For example, Malaysia’s approach uses a sale and buy-back contract known as inah, but the practice has been shunned by Gulf-based Islamic banks which argue that transfer of ownership of assets is not clearly executed.

The IIFM’s collateralised murabaha format tries to avoid controversy by having the financier buy the asset at market value and immediately sell the asset to the customer for a mark-up on a deferred payment basis.

But in practice, such transactions need more clarity to gain wider acceptance, said IIFM chief executive Ijlal Ahmed Alvi.

“There is still a lot of work and deliberation needed such as fixing of forward leg between two counterparties, the legal entity which can act as the third party and take risk, etc.”

For its own standard on repurchase agreements, AAOIFI will conduct extensive consultations with scholars on all aspects of the transactions, said secretary general Hamed Hassan Merah on the sidelines of AAOIFI’s annual conference in Manama last week. Merah did not specify when the standard might be ready.

Meanwhile, some regulators see short-term, U.S. dollar-denominated Islamic bonds (sukuk) issued by the Malaysia-based International Islamic Liquidity Management Corp (IILM) as collateral that might be used for sharia-compliant repos.

Nigeria’s central bank has issued guidelines for asset-backed securities that can employ IILM sukuk as collateral, while regulators in Indonesia are discussing ways to allow IILM sukuk to be used as guarantees in money market transactions.

“We are studying whether we can accept IILM to be traded as short-term sukuk securities within Indonesia’s Islamic money market,” said Halim Alamsyah, deputy governor of Bank Indonesia.

Islamic banks are largely buy-and-hold investors of sukuk; collateralised transactions could energise sukuk secondary markets by encouraging banks to make better use of those assets.

“Institutions of all sizes will be equally comfortable to transact and better utilise their Islamic securities portfolios, particularly sukuk,” said Khalid Hamad, executive director of banking supervision at Bahrain’s central bank and IIFM chairman.

(Gulf Business / 29 November 2014)

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Small-ticket Islamic banking may become possible with payment banks

mild form of Islamic banking - where the key tenet is that interest will neither be paid nor received - may become possible if one reads the fine print of the Reserve Bank of India's (RBI's) new guidelines for the setting up payment banks.

A key guideline for payment banks is that they can only invest in government securities upto a year's maturity - which means treasury bills. T-bills upto 364 days' maturity carry no interest; they are essentially discounted instruments where the face value is paid on maturity. For example, a 91-day T-bill of Rs 100 face value may be bid for (or offered) at Rs 98. No interest is payable, but one can deduce an in-built yield rate from the discount (Rs 2, in this case) and the holding period (91 days).

This means any Muslim non-bank financial institution can strictly follow the Koranic injunction on non-receipt of interest (called riba, which also means usury) - at least at the investment end of banking.

That leaves us with the question: what about deposit rates? Is that not riba, and thus sin in some Muslims' eyes?

True, but payment banks can get around this by offering interest-free deposit accounts - where the gains are given in the form of transaction discounts. A payment bank account, in any case, is not a big-ticket savings bank account; it is intended largely for settling transactions - paying bills, making purchases, making small payments to third parties, etc.

Two possibilities exist: one way is to offer those who hold zero-interest accounts to be compensated through discounts. For example, if the normal interest rate is, say, 5 percent on a deposit account, discounts equal to the value of 5 percent can be offered by the bank on bills payable to, say, a mobile company, a power company, or on a Flipkart/Amazon purchase, etc.

The other way is to allow depositors to also become shareholders or profit sharers. This would need the RBI's indulgence and permission, but if a proportion of the profits of the payments bank can be earmarked as dividends for depositors, this issue can be sorted out. A simple tweak of the guidelines, where the bank will be allowed to pay dividends annually on zero-interest accounts would do the trick.

Beyond Islamic banking, which is actually nothing but interest-free or profit-and-loss share banking that has been given a sectarian title, it is possible for e-commerce or mobile companies to offer customers discounts on bills in addition to their normal interest earnings on savings deposits.

The RBI has not been too keen on Islamic banking for the simple reason that you can't run two separate regulatory regimes in one integrated banking system. However, payment banks are an option that NBFCs who want to tap the sharia-conscious customer can look at closely.

(First.Biz / 28 October 2014)

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Pakistan raises $1b through Sukuk

ISLAMABAD: 

In a second largest single transaction in less than a year, Pakistan has raised $1 billion from international debt markets through the issuance of five-year dollar-denominated Sukuk bonds. This will help Islamabad build foreign currency reserves to the satisfaction of the International Monetary Fund (IMF).

The transaction is expected to restore international investors’ confidence, which was shattered after an unsuccessful attempt to sell stakes in the Oil and Gas Development Company Limited (OGDCL).

The government decided to accept offers of $1 billion for a five-year tenor at a profit rate of 6.75%, which is half percentage points lower than the price at which the five-year Euro bond was sold in April 2014, the finance ministry said on Wednesday.

Unlike the Euro bond that was issued without collateral, the government has pledged the Islamabad-Lahore Motorway to raise funds that helped it keeping the interest rate below the Euro bond transaction when it raised $2 billion. Sukuk is Islamic bond that has to be backed by collateral.

The 6.75% interest rate for $1 billion is 5.17 % over and above the benchmark five-year US Treasury rate. Very low interest rates in Western and European markets amid fears of global slowdown of economies have also increased interest in highly lucrative sovereign papers issued by developing economies.

The government was seeking to raise only $500 million. However, investors showed a very high interest and made subscription of $2.3 billion, which was nearly five times of the target amount, said the ministry.

It decided to raise $1 billion to offset impacts of the failed OGDCL transaction on foreign currency reserves. The successful transaction may revive the investors’ interest in upcoming Habib Bank Limited capital market transaction. The government is hoping to raise $1.2 billion by selling its remaining 42.5% stakes in the HBL.

The IMF has asked Pakistan to increase its official foreign currency reserves to $13 billion by June next year from the present $8.5 billion.

The geographical interest of investors was well distributed with 35% subscriptions coming from Europe, 32% from the Middle East, 20% from North America and 13% from Asia. The order book comprised top quality investors from all parts of the globe, the finance ministry added.

Finance Minister Senator Ishaq Dar said the success of transaction was a reflection of confidence of the international investors’ community in Pakistan’s economic policies. He added that the profit rate of 6.75% compares favourably with the average weighted cost of comparable domestic debt of about 11% in Pakistan, and will save the country about Rs5 billion annually in debt servicing.

The proceeds of the Sukuk will go to the State Bank and the rupee proceeds of an equivalent amount will be used for retirement of domestic debt.

(The Express Tribune / 27 November 2014)

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Moroccan parliament approves Islamic finance legislation

Morocco's parliament gave final approval on Tuesday to an Islamic finance bill that will allow the creation of Islamic banks and enable private firms to issue Islamic debt, lawmakers said.

Morocco has been trying to develop Islamic finance - mainly to attract wealthy Gulf investors - since an Islamist-led government took power in the aftermath of the 2011 Arab Spring protests.

Islamic banks, which ban interest payments and pure monetary speculation, have been growing in the Gulf and Southeast Asia for a decade. Wary of Islamist views, Morocco has long rejected the idea. But the country's financial markets a lack liquidity and foreign investors, and Islamic finance could attract both.

"The bill has been voted by 161 votes and no one was against it," Said Khayroune, the head of parliament's economics and finance committee, told Reuters. The bill will be effective once it is published in Morocco's official bulletin in coming days.

The law will allow foreign banks and local lenders to set up Islamic banks in Morocco. It also contains measures on takaful, which allows the creation of Islamic insurers, and will enable private companies to issue sukuk (Islamic debt).

Major Moroccan banks have been preparing to open Islamic offshoots since the legislative process began. Foreign lenders have been also testing the waters.

Gulf banks from Kuwait, Bahrain and the United Arab Emirates have expressed interest in entering the market when the bill becomes law.

But sources have told Reuters Morocco may guide them towards partnering with local banks rather than establishing fully owned Islamic subsidiaries.

Morocco's BMCE Bank is preparing to open an Islamic subsidiary as a joint venture with a major Islamic financial institution from the Middle East, the bank's managing director has said.

Other Moroccan banks, including Attijariwafa Bank and Banque Centrale Poulaire, are believed to be in talks with foreign Islamic lenders.

But a Thomson Reuters study of Morocco, released earlier this year, estimated Islamic banks might account for 3 to 5 percent of total banking assets by 2018, or about $5.2 billion to $8.6 billion - far below the roughly a quarter in the developed markets of the Gulf.

The Moroccan market remains highly competitive, and bankers believe banking would expand by only a few percentage points, since Islamic finance is more expensive than conventional banking.

(Reuters / 25 November 2014)

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Religion, flexibility and reduced risk push Islamic finance growth

ADU DHABI, Nov 23 — When a Muslim cleric told Ahmad Salim that shariah law forbids paying interest, he returned his days-old loan to the bank and turned to the fast-growing industry of Islamic finance.

It is a market that has doubled in size over the past four years and is now worth more than US$2 trillion (RM6.6 trillion), with demand forecast to soar to new heights.

Salim returned a US$35,000 loan just two days after he received it from a conventional bank in Kuwait.

“A cleric told me it is not permissible under Islam to take loans from a non-Islamic bank because they charge interest,” the white-collar worker said.

A few days later, he arranged for a loan from an Islamic bank after paying a US$700 service charge.

As well as the religious aspect, customers are attracted to Islamic finance by its flexibility, link to real economic activity and its ban on transactions involving speculation or uncertainty, experts say.

To meet ever-increasing demand, Islamic finance has developed numerous products compliant with shariah law, from loans for cars and houses to funding for major infrastructure projects.

“Despite being governed by strict religious principles, Islamic finance remains highly flexible and less risky. These have helped it to expand fast and meet various forms of demand,” Kuwaiti economist Hajjaj Bukhdur told AFP.

Around 40 million of the world’s 1.6 billion Muslims are now clients of the Islamic finance industry, which has surged in popularity since its days as a small niche market in the early 1970s.

The International Monetary Fund (IMF), the World Bank, and other global economic bodies estimate that the assets of Islamic financial institutions grew nine-fold to US$1.8 trillion between 2003 and last year.

They are estimated to have already crossed the US$2 trillion mark.

The industry, which spans more than 70 countries, could be worth US$4 trillion by 2020, according to forecasters including Standard and Poor’s.

About 80 per cent of the assets are now in banks, 15 per cent in Islamic bonds called Sukuk, four per cent in investment funds and one per cent in Islamic insurance known as Takaful.

Iran accounts for about 40 per cent of Islamic banking assets, Saudi Arabia 12 per cent, and Malaysia 10 per cent.

Shunning toxic assets

Proponents argue that Islamic banks outperformed their conventional counterparts during the 2008 global financial crisis.

Their capital and liquidity buffers are seen as helping to shield them during market turbulence or credit shocks.

“Islamic banks generally escaped the worst effects of the 2008 financial crisis because they were not exposed to subprime and toxic assets,” World Bank managing director Mahmoud Mohieldin said in a recent research note.

But the industry, based on the sharing of profit and losses, was badly hit by the second round of the crisis which affected real estate and other sectors in the Gulf region.

“In the Gulf, both Islamic and conventional banks and companies were hit equally by the crisis. Some Islamic investment companies were forced out of the market,” Saudi economist Abdulwahab Abu-Dahesh said.

Islamic finance’s link to solid assets is seen as one of its major strengths.

“They do not deal in derivatives or speculation,” said Abu-Dahesh, a former senior economist with a conventional bank.

Introduced more than a decade ago to cater for large-scale financing, Sukuk bonds are among the most successful Islamic financial products.

Sharia prohibits trade in debt, so unlike conventional bonds, which give ownership of debt, Sukuk are asset-based securities that give investors a share in the project. They also offer better yields.

In June, Britain became the first sovereign issuer of Sukuk outside the Islamic world with an issue of £200 million (RM1.05 billion), an offering that was swamped by strong demand.

The global value of such outstanding bonds was US$269 billion at the end of 2013, and the market is expected to expand at a double-digit rate, Dubai International Financial Centre governor Essa Kazim estimates.

Sceptics say the booming industry owes its success to religion, but others say it also makes financial sense.

“I have been dealing with Islamic banks for the past two decades for purely economic reasons and good profit,” said Amin Mahmoud, a private sector manager.

(Malay Mail Online / 23 November 2014)

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Pakistan picks banks to hold dollar sukuk roadshows, will start Monday

Pakistan has mandated four banks to arrange fixed income investor meetings starting Monday ahead of a potential issue of a U.S. dollar-denominated Islamic bond, a document from lead managers said on Sunday.

The sovereign, rated Caa1 by Moody's and B- by Standard & Poor's, has picked Citigroup, Deutsche Bank, Dubai Islamic Bank and Standard Chartered to arrange the roadshows and the possible deal, it showed.

Pakistan will hold roadshows in the United Arab Emirates on Monday, before heading to London and Singapore on Tuesday, with a 144A-compliant, benchmark-sized sukuk to follow, subject to market conditions, the document added.

Benchmark size is traditionally understood to mean upwards of $500 million. If a debt issue is 144A-compliant, investors in the United States can buy the offering.

The sukuk uses a sharia-compliant sale and lease-back structure to underpin the transaction. Proceeds will be used to purchase land comprising the M-2 Motorway, which connects Lahore to the capital Islamabad.

Political instability in Pakistan had temporarily caused some uncertainty around the sovereign sukuk issue as Prime Minister Nawaz Sharif came under pressure from weeks of demonstrations calling on him to resign.

Pakistan, a favourite with frontier market investors since peaceful elections were held there last year, sold $2 billion of dollar-denominated bonds in April after attracting $7 billion in investor orders.

In September 2013, the IMF saved Pakistan from possible default by agreeing to lend it $6.7 billion over three years.

The sukuk will be issued by Pakistan International Sukuk Company and is expected to be listed in the Luxembourg Stock Exchange.

Pakistan's external debt was about 19 percent of gross domestic product (GDP) on June 30 and it had a fiscal deficit of 5.5 percent of GDP in 2013-2014, it showed.

(Reuters / 23 November 2014)

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Mashreq sees sukuk pipeline starts spilling deals after market volatility

After sales of Islamic bonds began the fourth quarter at the slowest pace in six years, sukuk from companies including FlyDubai and Bahrain Mumtalakat Holding Co are among deals announced or sold this week. They will increase the amount raised this quarter to at least $5bn.

“These deals have been in the pipeline and the market volatility in September and October delayed them,” said Abdul Kadir Hussain, the chief executive officer of Mashreq Capital DIFC Ltd, who correctly predicted last week that sales would rebound. “The market seems supportive now and issuers are trying to get them out of the way.”

Bond volatility dropped 32% since reaching a more than one-year high on October 15, according to the Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options. There is demand for Islamic debt, especially for some of the new issuers, as they offer a higher yield than the more established ones, according to Apostolos Bantis, a credit analyst at Commerzbank AG in Dubai.

FlyDubai, the Dubai-based budget carrier, is selling as much as $500mn in sukuk. Bahrain’s sovereign wealth fund tapped the Islamic bond market for the first time on Tuesday, raising $600mn, while Drake & Scull International issued Shariah-compliant debt earlier this week.

FlyDubai, which is wholly owned by the Dubai government, is said to pay as much as 212.5 basis points above midswaps, the people said. That compares with about 165 basis points over the corresponding midswap that Emirates is paying on its sukuk maturing in March 2023. The airline is the world’s biggest by international passenger traffic.

Global sukuk yields have retreated 17 basis points since reaching a five-month high in October to 2.8% on November 18, according to a gauge compiled by Deutsche Bank AG.

The latest transactions won’t be enough to make for a record sukuk issuance year, Hussain at Mashreq Capital, which manages about $1.2bn, said by e-mail from Dubai on Tuesday. “Net new issuance will be flat to lower,” he said.

Sukuk sales have exceeded $40bn in 2014 compared with last year’s total of $43.1bn, according to data compiled by Bloomberg.

Turkey sold $1bn in 10-year Islamic bonds on Tuesday, the first sukuk offering since October 2013. Advanced Petrochemicals Co in Saudi Arabia said on Tuesday it sold a five-year floating-rate sukuk in a private placement, issuing 1bn riyals ($267mn). Drake & Scull, based in Dubai, also raised $120mn via a five-year sukuk in a private placement.

The issuer base is “widening,” Afaq Khan, chief executive officer of Standard Chartered Saadiq, said by phone on Tuesday. “It’s diversifying portfolios not only in terms of industries, but also geographies and in terms of risk reward so you can have Islamic Development Bank and FlyDubai in your portfolio.

(Gulf Times / 21 November 2014)

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Malaysia: CIMB Islamic partners IRTI to produce Islamic finance country reports

KUALA LUMPUR: The Islamic Research & Training Institute (IRTI) of the Islamic Development Bank (IDB) Group and CIMB Islamic Bank Bhd has partnered to develop the Islamic Finance Country Reports (IFCR) on Malaysia and Indonesia. 

The IFCR is expected to provide in-depth information, and independent due diligence to facilitate the growth and development of the Islamic finance industry in IDB Group member countries and encourage investment by enhancing transparency.

Ini a statement on Friday, CIMB Islamic chief executive officer Badlisyah Abdul Ghani said that stakeholders within the industry need to be adequately equipped with necessary knowledge and better understanding to steer the business towards new directions within the Islamic finance industry.

He added that IFCRs will provide the industry with valuable knowledge resources towards enhancing the Islamic finance industry and cater to the growing number of customers in the real economy through well-structured, sustainable and innovative products and services.

Meanwhile, director general of IRTI Mohd Azmi Omar said that IFCR will analyze the success story of the Malaysian Islamic finance industry and provide the lessons learnt to other IDB member countries. 

Through this combined initiative, the two institutions aim to facilitate access to information that is currently not available to stakeholders and thereby ontribute to the growth and development of the Islamic finance industry. 

Apart from helping to increase investor confidence, the reports will facilitate better understanding mong regulators, market players, academicians, students and other stakeholders.

(The Star Online / 21 November 2014)

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Malaysia: Great Eastern inks takaful deal with Bank Muamalat

KUALA LUMPUR: Great Eastern Takaful Bhd has signed an agreement to distribute bancatakaful products with Bank Muamalat Malaysia Bhd, enabling the former to tap into the latter’s customer base of 700,000.

Great Eastern chief operating officer Zafri Abdul Halim said the partnership is the best step to maximise both companies’ potential in providing holistic financial solutions to customers as it will allow Bank Muamalat to access Great Eastern’s range of products that will enhance the bank’s product offerings to its customers.

“Currently, three credit-related takaful products pertaining to housing loan, hire purchase and personal loan are available at Bank Muamalat. As for advisory, our investment-linked family takaful plan, i-Great Bakti, is offered through Bank Muamalat so far,” he said at the signing ceremony and the joint launch of its first family takaful plan, M-Tiara Hajj.

M-Tiara Hajj takaful plan provides assistance from as low as RM100 to prepare for customers’ Haj as well as a maximum of RM500 aid to certificate holders to help finance the cost of a Qurban during Hari Raya Aidiladha.

In the last financial year, bancatakaful from Bank Muamalat contributed about 10 per cent to Great Eastern’s takaful revenue.

“We expect to achieve substantial growth in terms of contribution with the launch of M-Tiara Hajj. With Bank Muamalat’s resources and commitment, we are confident that we are able to achieve this target,” Zafri said.

Bank Muamalat expects to see a take up rate of 3,000 from its base customers on the joint product.

“We received good feedback on the soft launch for the product three months ago even though the promotion campaign and exposure on the product is not wide enough,” said its head of consumer banking division Attar Salleh.

“The take up rate is expected to be achieved by the end of our year ending March 31 next year.” he added.

(New Straits Time Online / 19 November 2014)

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Islamic finance body AAOIFI to revise four standards, eyes sukuk

The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) will revise four of its standards in the first half of next year while expanding its guidance for Islamic bonds, the industry body said.

Earlier this month, AAOIFI issued two new standards and revised three others as it takes a more proactive approach under its new secretary general, Hamed Hassan Merah.

AAOIFI held its annual conference this week, after which it said it would seek either to revise or supplement its existing standard for sukuk, to provide the industry with more extensive guidance.

"We are...looking at the possibility of developing clearer guidance on sukuk that will incorporate accounting, legal, technical and tax-related aspects," Merah said in a statement.

Sukuk issuance is increasing worldwide but the structures used to create the instruments aren't uniform, which limits their cross-border acceptance by investors and trading in the secondary markets.

Year-to-date, sukuk issuance totals $110.9 billion through 665 deals globally, up from $97.3 billion through 703 deals a year earlier, according to Zawya, a Thomson Reuters company.

AAOIFI is also revising its accounting standards covering investment accounts, takaful (Islamic insurance), and ijara and murabaha financing structures.

A revised investment accounts standard is to be released by the end of 2014, important for Islamic banks which are seeking greater clarity on how to classify their deposits.

Consultations on takaful, ijara and murabaha will be conducted in the first half of 2015, AAOIFI said.

On takaful, AAOIFI is considering how to extend its guidance to retakaful, the issue of fixing agency fees rather than linking the fees to profits or performance, and clarifying the definition of benevolent loans (qard hassan), a conference document showed.

For ijara, a sale and lease-back contract, AAOIFI wants to clarify distinctions between operating and financing leases. Industry practice is currently not aligned with the ijara standard, known as FAS 8; proposed changes would cover income recognition, balance sheet classification, depreciation, amortisation and disclosures, according to a separate conference document.

AAOIFI's murabaha standard will be redesigned to stipulate the use of collateral for the recovery of receivables, while specifying accounting treatment and disclosure requirements, a third document showed.

The body is also engaging its counterpart in conventional finance, the London-based International Accounting Standards Board; AAOIFI invited IASB officials to its annual conference in Manama.

An IASB official said on the sidelines of the conference that his organisation would seek to develop non-binding guidance on the interpretation of their standards by Islamic financial firms, to help reduce uncertainty in the marketplace.

(Reuters / 19 November 2014)

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Islamic finance body IIFM launches collateralised murabaha standard

The Bahrain-based International Islamic Financial Market (IIFM) has launched a standard contract template for collateralised murabaha transactions, aiming to boost use of a sorely needed liquidity management tool for Islamic finance institutions.

The standard will serve as an alternative to repurchase agreements, which are common money market tools used by conventional banks but are largely absent in Islamic finance.

It is the sixth standard issued by the IIFM, a non-profit industry body which develops specifications for Islamic finance contracts.

"Finding a sharia-compliant alternative to repurchase agreements has become absolutely essential and imperative to help meet the liquidity requirements of the industry, and the collateralised transaction is at present the best alternative," chief executive Ijlal Ahmed Alvi told Reuters.

Collateralised murabaha deals are already taking place, but the agreement will help to standardise them while attracting more Islamic banks that have been awaiting guidance, Alvi said.

Several banks want to have the collateralised murabaha format approved by their own sharia boards, so they can have it in place alongside existing tools in case of any potential liquidity squeeze, he added.

"Clean lending has become more difficult, especially for the smaller Islamic banks, and this helps to keep as a contingency."

The new template is accompanied by detailed guidance notes, the first the IIFM has published, which clarify issues such as margin maintenance and custodial services, Alvi said.

Sharia-compliant alternatives to repos are scarce: Malaysia and Bahrain have their own approaches but these are approved at the domestic level and limited to local-currency collateral.

In the United Arab Emirates, the first collateralised murabaha transaction occurred in 2011 between National Bank of Abu Dhabi and Abu Dhabi Islamic Bank.

REPO

Conventional repos allow institutions to lend out assets for short periods to generate liquidity; this is disallowed in Islamic finance as it entails the charging of interest. Collateral is often lent out by custodians, a practice known as rehypothecation, which also contravenes Islamic principles.

Even the phrase "Islamic repo" is problematic among scholars who fear the instruments will simply replicate conventional financial products without addressing a real economic need.

Collateralised murabaha is a cost-plus profit arrangement which tries to avoid such issues by having the financier buy the asset at market value and immediately sell the asset to the customer for a mark-up on a deferred payment basis.

Because the mark-up price is agreed up front by both parties, this addresses the element of ambiguity, or gharar, a key principle in Islamic finance.

Transactions can be secured by any sharia-compliant assets, including equities and sukuk (Islamic bonds). The standard expressly forbids rehypothecation.

The IIFM has previously launched standard contract templates for sharia-compliant profit rate swaps as well as hedging and treasury transactions. It is working on standards for cross-currency swaps, foreign exchange forwards, and several common sukuk structures, including convertible and exchangeable sukuk.

The body started operations in 2002, founded by the Islamic Development Bank and the central banks and monetary authorities of Bahrain, Brunei, Indonesia, Malaysia and Sudan. Additional members include the State Bank of Pakistan and the Dubai International Financial Centre.

The central bank of Kazakhstan plans to join the IIFM, whose membership is expected to grown alongside the number of standards issued, said Alvi. 

(Reuters / 16 November 2014)

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SUKUK PIPELINE - Issue plans around the world

The Thomson Reuters Global Sukuk Index is at 115.64836 points, up from 115.41158 at the end of last month and 109.78969 at the end of last year. The Thomson Reuters Investment Grade Sukuk Index is at 113.89345 points, against 113.67021 at end-October and 107.28036 at the end of 2013.

INDONESIA - The Indonesian government plans to issue global sukuk in the first quarter of next year before the U.S. Federal Reserve starts increasing interest rates, Scenaider Siahaan, a director at Indonesia's Debt Management Office Management, told Reuters; he did not give details.

FLYDUBAI - The United Arab Emirates' flydubai mandated CACIB, Dubai Islamic Bank, Emirates NBD, HSBC, NBAD, Noor Bank and Standard Chartered to arrange fixed income meetings between Nov. 13 and 18 for a dollar-denominated benchmark sukuk issue, bankers said.

JIMAH EAST POWER - Maybank Investment Bank has teamed up with AmInvestment Bank as joint lead manager for the 8.4 billion ringgit ($2.5 billion) sukuk murabaha project financing bond of Malaysia's Jimah East Power, bankers said in early November. Timing for the launch of the issue may slip from a targeted financial close in early November.

PAKISTAN - Pakistan plans to issue a U.S. dollar-denominated Islamic bond worth at least $500 million in November, Finance Minister Ishaq Dar said early in the month after meeting International Monetary Fund officials.

FLEETCORP - Turkey's Fleetcorp, wholly owned by Kuwait's The International Investor, has received regulatory approval to raise up to 150 million lira ($66.2 million) via sukuk, the Capital Markets Board said in early November.

DRB-HICOM - Malaysian conglomerate DRB-Hicom said in early November it had applied to the Securities Commission for a proposed perpetual sukuk musharaka programme of 2 billion ringgit.

BANK RAKYAT - Bank Kerjasama Rakyat Malaysia was to kick off bookbuilding on a ringgit-denominated sukuk in the week of Nov. 10. CIMB and Maybank are joint lead managers for the offer, which is expected to comprise tenors of five and/or seven years. The bank aims to raise at least 300 million ringgit.

MUMTALAKAT - Bahraini sovereign fund Mumtalakat set up separate sukuk and conventional bond issuance programmes at the Irish stock exchange to raise as much as $1 billion, to help refinance maturing debt next year, Fitch Ratings said in early November.

AIRASIA - AirAsia Bhd, Asia's largest budget airline, is seeking to raise up to 1 billion ringgit with a sukuk programme to fund aircraft and spare part purchases as well as to refinance its debt, bankers said at the end of October.

BANK MUSCAT - The Islamic unit of Bank Muscat, Oman's largest lender, plans to tap the sukuk market in the first quarter of next year, in what would be the first sukuk sale by a bank in the country, a bank official said in late October. The issue would fall under a 500 million rial ($1.3 billion) sukuk programme which shareholders approved in March this year.

TEMASEK EKSLUSIF - Temasek Ekslusif, a wholly owned unit of Malaysian property developer Gamuda Bhd, will raise up to 1 billion ringgit with Islamic bonds, ratings agency RAM Ratings said late in October.

OMAN - Oman's government will make its first issue of rial-denominated sukuk for the domestic market as soon as in the first quarter of 2015; the issue may be worth the equivalent of around $300 million or $400 million, with maturities of five or seven years, financial affairs minister Darwish al-Balushi told Reuters in late October.

KAZAKHSTAN - Kazakhstan may make its second international issue of sukuk next year, central bank governor Kairat Kelimbetov told Reuters in late October. The issue would probably be quasi-sovereign but plans have not been finalised yet; details are likely to be decided near the end of this year.

LUXEMBOURG - Luxembourg is open to the idea of making more sovereign sukuk issues after conducting its first such issue at the end of September, Luxembourg finance minister Pierre Gramegna told Reuters in late October.

ADVANCED PETROCHEMICAL - Saudi Arabia's Advanced Petrochemical Co will begin meeting investors on Oct. 26 ahead of a potential sale of sukuk denominated in riyals, it said.

TUNISIA - The Tunisian government picked banks including Citigroup, Natixis and Standard Chartered for a debut U.S. dollar sukuk issue, sources said in late October. Tunisia's prime minister told Reuters that the $500 million isue was expected to be completed this year.

ETISALAT - Abu Dhabi-based telecommunications firm Etisalat is planning its first sukuk issue, bankers told IFR in early October. The company will have the documents ready in coming weeks, but the deal is more likely to be launched in early 2015, they said.

BANK ISLAM - Malaysia's Bank Islam, wholly owned by BIMB Holdings, has set up a 1 billion ringgit subordinated sukuk programme to boost its regulatory capital, RAM Ratings said in early October.

BINTULU PORT - Malaysia's Bintulu Port Holdings is expected to prepare for its planned Samalaju Port project with a proposed sukuk issue, likely to be 700-800 million ringgit, The Edge daily reported in early October.

TURKEY - Turkey wants to make an international sovereign sukuk issue annually, but has not yet made final plans for a sukuk this year, a Treasury official told IFR in early October.

MALAYSIA MARINE - Malaysia Marine and Heavy Engineering said in late September it had received approval from the Securities Commission to establish a sukuk murabaha programme of up to 1 billion ringgit.

TURKIYE FINANS - Turkiye Finans Katilim Bankasi plans to issue $50 million worth of ringgit-denominated sukuk in Malaysia by year-end to diversify its funding base, chief executive Derya Gurerk told Reuters in late September.

MAHCO MALAYSIA - Mahco Malaysia, a vehicle to issue sukuk for Mohammed Othman Al Houkail Trading & Contracting Co, a medium-sized contractor in Saudi Arabia, proposed an Islamic medium-term note programme of up to 300 million ringgit, RAM Ratings said in late September.

CENDANA SEJATI - Malaysia's Cendana Sejati, a unit of local bank Masraf Al Barakah, proposed a 360 million ringgit senior sukuk murabaha medium-term note programme, RAM Ratings said in late September.

AGAOGLU - Turkish construction-to-energy Agaoglu Group plans to raise around $300 million by issuing sukuk, Niyazi Albay, Agaoglu's chief investment officer, told Reuters in mid-September. No specific time frame was given.

KUVEYT TURK - Lender Kuveyt Turk, 62 percent owned by Kuwait Finance House , plans to issue sukuk in Malaysia, aiming to raise as much as 2 billion ringgit, Turkey's Capital Markets Board said in mid-September. It gave no details.

AKTIF BANK - Aktif Bank, Turkey's largest privately owned investment bank, has received regulatory approval to issue 200 million lira in sukuk, the Capital Markets Board said.

IFFI - The International Finance Facility for Immunisation Co. (IFFI), for which the World Bank acts as treasury manager, has picked four banks for a potential U.S. dollar-denominated sukuk, a document from lead managers showed in mid-September.

DOGUS GROUP - Turkish conglomerate Dogus Group has received regulatory approval to raise $370 million by issuing the country's first U.S. dollar-denominated corporate sukuk, the Capital Markets Board said in late August. No time frame was given.

CIMB Islamic - CIMB Islamic, the sharia-compliant unit of Malaysia's second largest bank, is preparing an Islamic bond programme to raise up to 5 billion ringgit, ratings agency MARC said in late August.

SUNWAY - Malaysian property developer Sunway will raise up to 2 billion ringgit by issuing sukuk mudaraba, it said in August; short-term commercial paper under the programme will have maturities of between a month and a year, while medium-term notes will have maturities of one to seven years. Sunway will make its first issuance within two years.

MALAYSIA AIRPORTS - Malaysia Airports Holdings hired four banks for a subordinated perpetual sukuk musharaka to raise 1 billion ringgit; investor meetings would be held on Aug. 25.

RAS AL-KHAIMAH - The emirate of Ras al-Khaimah, part of the UAE, invited banks to pitch for arranger roles on a potential dollar-denominated sukuk, sources said in early June. However, bankers said in August that Ras al-Khaimah had sent out requests for proposals for a syndicated loan, casting doubt on whether the planned sukuk issue would now go ahead.

GULF FINANCE HOUSE - Bahrain-based Gulf Finance House said in mid-August it planned a $200 million sukuk issue to repay outstanding debt and for acquisitions. The deal would take place in coming months.

ADIRA DINAMIKA - Indonesia's PT Adira Dinamika Multi Finance plans to raise at least 500 billion rupiah ($42 million) with ringgit-denominated sukuk in Malaysia by the end of the year, bankers said.

K-ELECTRIC - Karachi-based utility K-Electric plans to raise as much as 22 billion rupees ($223 million) through sukuk to refinance existing debt, the company said in late June.

KENYA - Kenya plans to issue another international bond and may consider a debut sukuk issue, the finance minister said in late June, after a successful debut $2 billion eurobond closed.

BANK MUAMALAT - Malaysia's Bank Muamalat, a unit of sovereign fund Khazanah and auto-to-property conglomerate DRB-Hicom Bhd, will raise up to 2 billion ringgit with Islamic bonds, credit agency Malaysian Rating Corp said in late June.

BAHRI - National Shipping Co of Saudi Arabia (Bahri) plans to arrange long-term sharia-compliant financing in the next year to replace a bridge loan backing its $1.3 billion acquisition of Saudi Aramco's marine unit, Bahri said in June. Banking sources prebiously told Reuters Bahri was looking at a potential debut sukuk issue to replace the bridge loan.

SOCIETE GENERALE - Societe Generale completed the roadshow for the first issue in its 1 billion ringgit multi-currency sukuk programme in Malaysia, and would decide on the size in days, the bank said on June 18. In early July, banking sources said Societe Generale was still seeking a window to launch.

IFC - The International Finance Corp, the World Bank's lender to the private sector, is considering a return to the Islamic bond market, an IFC official said. A sukuk issue is still in the early stages of discussion but would likely be in the fiscal year starting in July 2014.

JORDAN - Jordan's government is studying a proposal to issue its first Islamic bond as early as next year, possibly raising over $1 billion in multiple currencies, but a preference for concessionary loans from aid donor countries could hinder the plan, government sources said.

MALAYSIAN RESOURCES CORP - Malaysian Resources Corp, a local construction firm, said on June 12 it would issue Islamic bonds to raise up to 680 million ringgit for land acquisitions and working capital.

BANGLADESH - The central bank is seeking to amend rules on its existing sukuk programme to broaden its use and allow for sovereign issuance by the government, a central bank spokesman said in June.

AL OTHAIM - Saudi Arabia's Al Othaim Real Estate and Investment Co, owner of five shopping malls in the kingdom, plans to issue its debut local currency sukuk as early as in June, sources aware of the matter said at the start of the month. The transaction is likely to be worth between 500 million and 1 billion riyals ($133-267 million), one of the sources added.

JEDDAH ECONOMIC CO - Saudi Arabia's Jeddah Economic Co said in mid-May it was in talks with local banks to raise funds for the 14 billion riyal first phase of its Kingdom City project. For part of the money, "we are looking at the bonds and sukuk market but this will need a structure in place, which we are working on," chief executive Mounib Hammoud said.

PELABURAN MARA - Malaysia's Pelaburan MARA, the investment arm of Majlis Amanah Rakyat, plans to issue sukuk worth up to 1 billion ringgit this year or next to finance its investments in the oil and gas and technology sectors, group chief executive Nazim Rahman was quoted as saying in April by The Edge Financial Daily.

HUA YANG - Malaysian property development firm Hua Yang Bhd said on April 29 it had won approval from the securities commission to raise up to 250 million ringgit with an Islamic bond programme.

FIRST GULF BANK - Abu Dhabi's First Gulf Bank, the third-largest bank by assets in the United Arab Emirates, plans to raise up to 3.5 billion ringgit with Islamic bonds in Malaysia, RAM Ratings said in March.

KILER REIT - Turkish real estate investment trust Kiler GYO plans to issue a five-year sukuk worth at least $100 million in the second half of this year, parent company Kiler Holding's chief financial Officer Kaan Aytogu said in February.

ACWA - Last December, Saudi Arabia-based water and power project developer ACWA Power said it had raised a 1.77 billion riyal Islamic loan from four local banks to help finance investments including acquisitions and act as a bridge to a sukuk issue in 2014.

(Yahoo News/ 17 November 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com